Home loan aid programs could be cut in housing bill

Legislation being debated in the Senate this week eliminates nonprofit down-payment assistance programs, which have surged in popularity over the past decade. Lawmakers in the House, meanwhile, want to impose new regulations but not get rid of the programs entirely.

Critics say defaults and foreclosures from these no-money down loans are rising to such an extent that they threaten to put taxpayers on the hook if a government-run mortgage insurance fund someday needs a bailout. They also question whether the charities involved deserve their nonprofit status.

The down-payment arrangements involve charities that receive money from a home seller, who is eager to help the buyer out and get the deal done. The charity then turns around and provides a similar amount of financial assistance to the borrower, after charging the seller a processing fee--typically around $400 to $600--for its services.

The programs, which receive no federal subsidy, help borrowers qualify for loans backed by the Federal Housing Administration, a government agency that backs loans made to low-income borrowers or those with poor credit.

While the FHA does not allow sellers to provide assistance directly to buyers, the government ruled in 1998 that money routed through a nonprofit doesn't conflict with that prohibition, allowing such programs to surge in popularity.

Opponents say sellers, including homebuilders, merely inflate their prices to pay for the down-payment assistance. But supporters say that without such programs, borrowers such as April Keels, a 33-year-old school administrator from Atlanta, would be locked out of the housing market.

Nearly four years ago, Keels bought a new four-bedroom home outside Atlanta for $160,000, with $5,000 in down-payment assistance arranged through Sacramento, Calif.-based Nehemiah Corp. of America.

Saving up money for a down payment, she said, would have taken years. Ending the programs, in her view, would "hurt a lot of people like myself, middle-class Americans who are working really hard, who are paying their bills" but don't have enough saved for a down payment.

With dozens of subprime lenders having left the mortgage market last year as the housing crisis accelerated, "we are about the only game in town for lower-income families who just want a shot at the American dream," said Scott Syphax, chief executive of Nehemiah.